Review: ‘Sharper Axes, Lower Taxes – Big Steps to a Smaller State’

3 Aug 2011

Kristian Niemietz writes for the ÖkonomenBlog

If you have read a British newspaper during the past year, you have probably gained the impression that British government was in the process of shutting itself down. If so, you may be forgiven. The domestic media’s coverage of the coalition’s fiscal cuts was overripe with gory metaphors and dramatic formulations.

It comes as no surprise, then, that the majority of the electorate has a heavily distorted impression of the scope of the cuts. According to a poll commissioned by the London-based Institute of Economic Affairs (IEA), 70% of respondents believe the national debt was set to fall until 2015. If only! It is merely the budget deficit that will fall. Despite all the howls of protest, the cuts are but a drop in the ocean. Government spending will fall by an annual 0.7% in real terms, such that by 2015, the ratio of government spending to GDP will be back to its 2007 level. National debt will still increase by £350bn in the meantime.

To set the record straight again and bring some perspective into this debate, the Institute of Economic Affairs has gathered eleven authors to show what a genuinely comprehensive fiscal reform package would look like. The authors’ approach differs fundamentally from the coalition’s ‘salami slicing’, which largely retains the scope and structure of existing spending programmes, and just chops off bits and pieces here and there. ‘Sharper Axes, Lower Taxes’ goes back to the basics.

The authors take a strategic approach: They identify those elements of government spending where the ratio of spending to outcomes is especially miserable. Building on this, they develop proposals for an orderly retreat of the state from many of its present functions. Thus, this book is not simply about ‘cutting’. It is also about a smooth transition to non-political alternatives of service provision, for example through easing the entry of independent providers into healthcare, education and old-age saving.

If this programme was implemented, government spending could be brought to just below 30% of GDP within a single term. The income tax allowance could be more than doubled, and the tax rate cut to just 15%. Some of the most damaging taxes could be abolished in their entirety. The annual growth rate of the British economy could be raised by as much as ¾ of a percentage point. And the remaining tax revenue would still easily be enough to guarantee poor people have access to high-quality healthcare and education.

Those who deem these proposals ‘radical’ should bear in mind that up until the early 1960s, almost all OECD governments spent around 30% of the respective countries’ GDP. In some of the most successful economies, like Japan and Switzerland, the government even managed with less than a fifth of GDP.

Even in the unlikely event that a British government followed ‘Sharper Axes, Lower Taxes’ to the letter, Britain would still be far away from those dimensions. Maybe a topic for a Volume 2?